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Question
What effect does increased input prices have on the supply curve of a commodity? Draw a diagram to explain your answer.
Solution
If the prices of inputs rise, then the cost of production will increase. This will reduce the profit margin of the seller. As a result, the supply curve will shift to the left, indicating a decrease in supply.
In the diagram
- SS is the original supply curve.
- S1S1 is the new supply curve.
- A leftward shift in the supply curve indicates a decrease in supply.
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